Sit Tight and Batten Down the Hatches

He notes that the dividend yield on the Standard & Poor's 500 is about 2%, and that corporate earnings grow at an average of about 6% a year over the long term. Together, these two factors should provide investors with average annual returns of 8%, which is more than they can earn in bonds or cash, he says.

Currently, the ratio of share prices to annual corporate earnings is about 18 to 1 for the S&P 500, according to Bogle. If that gradually falls closer to the long-term average of around 15 to 1, it could remove about 1 percentage point a year from stock market returns, leaving investors making a still-healthy 7% a year.

Bogle puts the odds of a recession at 75%. Among the big factors, he says, is the drop in home prices, which is curtailing consumers' ability to use home-equity loans and refinancing to free up spending money." The consumer, of course, is king, creating about 70% of our GDP ," he states, adding, "I think we're in for one of the more significant economic storms of the last 30 years."

Editor's note: For more information about Knowledge@Wharton, please click here.

>To order reprints of this article, click here: Reprints